UK: Pensions Regulator Revises Clearance Guidance

Last Updated: 9 November 2007
Article by Denise Fawcett


In April 2005 the Pensions Act 2004 came into force. The Act gave the newly formed Pensions Regulator (the Regulator) so-called "Moral Hazard Powers" - powers to impose financial sanctions on employer companies and, potentially, connected or associated individuals, a defined benefit or hybrid occupational pension scheme in deficit: Contribution Notices and Financial Support Directions.

There was concern that the spectre of these sanctions could stifle corporate activity. To minimise this problem, parties were given the option of applying to the Regulator for clearance in respect of an event that could affect funding of the pension scheme. In return for the granting of clearance in respect of events considered to be materially detrimental to the scheme, there would generally have to be financial mitigation, for example, a lump sum payment, a schedule of additional contributions, a guarantee, a letter of credit or some other support.

At the same time as the Regulator came into being, so did the Pension Protection Fund (PPF). The Regulator was given the objective of protecting member benefits, in conjunction with the protection afforded by scheme trustees and the task of minimising the risk of claims on the PPF following the insolvency of an employer.

The clearance procedure was not prescribed by legislation and so the Regulator’s clearance guidance was written at a time when the clearance procedure was new and untested. With the benefit of two years’ practical experience under its belt the Regulator set about rewriting the clearance guidance. The 2007 draft revised guidance was issued for consultation on 10 September 2007.

2007 Changes: Re-Categorising Triggering Events

The 2005 guidance referred to three types of events, Types A, B and C. A Type A event was an event that was materially detrimental to the funding of the scheme. This has been retained. Type B was an event that was not materially detrimental to the scheme. This definition has been of limited use and has essentially been used to confirm that an event is not Type A. The Type C label was designed for an event that was detrimental to the scheme but was not within the control of the employer, for example, the loss of a major customer. Type C has been rarely used in practice. Therefore references to Type B and C events have been removed from the latest guidance.

Materially detrimental events have now been divided into two categories, employer-related events and scheme-related events. Employer-related events would only be appropriate for clearance where there is a relevant deficit (see below). Scheme-related events are appropriate for clearance regardless of the level of the deficit unless there is absolutely no detriment to the scheme whatsoever. This will only be the case in limited circumstances.

A materially detrimental event is one that weakens the employer covenant. Such an event is also materially detrimental if it has the effect of preventing the recovery of an employer debt owed to the scheme, compromising or reducing the debt, these being events that could lead to a Contribution Notice being imposed. Trustees are warned to look out for a series of events that, together, would have one or more of these effects.

Employer-Related Events

The revised guidance gives some examples of employer-related events but these are merely to assist and should not be taken to be a prescriptive definitive list. Examples given are events such as:

  • changing the priority of any debt of the employer or in the wider group

  • return of capital, particularly where money is being paid to group companies outside the EU or to parties which would not be subject to the Regulator’s moral hazard powers

  • changes to the employer group structure

  • "Phoenix" type situations and business sales whether from the employer or the wider group.

This is a longer list of events than in the 2005 guidance but does reflect the practice of the Regulator and is merely a reflection on the fact that the types of events that might appear in a clearance application were not anticipated to be as wide-ranging at the time the original 2005 guidance was written.

The relevant deficit to consider for clearance purposes is now the higher of FRS17, the PPF level of benefits, technical provisions (if the scheme has become subject to the new Scheme Specific Funding regime) and, if not, the scheme deficit calculated on an ongoing basis. It is not made clear whether the technical provisions should be calculated before or after the event, this figure being a moveable feast. If the relevant event causes there to be a deficit in technical provisions after the event, then this would suggest a material detriment to the scheme so that a calculation afterwards would appear to be appropriate.

However, before using any of these bases as the relevant deficit, the trustees should establish how detrimental to scheme funding the event in question might be. In the event of the sale of a company resulting in a high level of debt on the employer’s balance sheet or in the wider group, the Regulator has publicised that it would consider this to be an event causing significant detriment. This message was made clear, for example, when the Regulator was involved with the takeover of the Alliance Boots group of companies earlier this year.

A higher level of financial mitigation would be appropriate where there is significant detriment to the scheme or the ongoing viability of the employer in the long term is in doubt. Further, the buy-out deficit will be the appropriate yardstick where the event in question essentially amounts to scheme abandonment.

Scheme-Related Events

Examples of scheme-related events which will be appropriate for clearance, regardless of the level of deficit are debt compromises, apportionments, or arrangements that result in a section 75 debt not triggering or not being paid for a significant period of time.

While not expressly stated in the guidance, the mere introduction of an apportionment rule into the scheme drafted in a way that would not cause detriment should not suggest a need for clearance (for example, where the power can only be used with trustee consent as to how it is exercised, or where the timing and/or amount of the debt are subject to trustee consent). The use of such a rule will, however, be a Type A event. Exceptions to this, set out in the guidance, are where apportionment increases a debt immediately due from an employer which can afford to pay, where the best estimate of a debt is being paid (presumably immediately, although this is not expressly stated) in circumstances where the cost and complexity of approved withdrawal or other alternative arrangement are disproportionate and where there is no reduction in the employer covenant. For example, this might be the case where employers are consolidating.

Trustees should carry out an assessment of any scheme-related event and the appropriate mitigation (in terms of its materiality and potential effect on the employer covenant). This will generally be done in reliance upon a financial report prepared by an accountant specialising in pensions issues. Such reports would be expected to include recommendations as to the nature and amount of mitigation that the trustees should request of the employer and its group of companies.

General Issues

Trustees are also reminded that they can revisit a recovery plan at any time, if considered appropriate having regard to the nature and effect on the scheme of the relevant event. However, arrangements made under the scheme specific funding regime are not an alternative to financial mitigation. Trustees may, for example, consider it appropriate to reopen the plan if the employer does not apply for clearance and does not pay an appropriate level of mitigation for the event to the scheme if this is likely to be a suitable alternative to mitigation.

Companies are reminded by the Regulator that clearance relates only to the event described in the clearance application. Clearance is not retrospective or forward-looking. This means, for example, that if, in the future, the scheme becomes insufficiently resourced then any party that is connected and associated could be a target for a Financial Support Direction (FSD) despite having been given clearance in respect of a previous event. The clearance given merely means that the event that was the subject of the application will not be taken into account when assessing whether it is reasonable to impose such a sanction. In practice the Regulator has been disinclined to give FSD clearance to parties who remain connected and associated after the event. If the Regulator can be persuaded to give clearance it is necessary for the applicant first to confirm that it understands the scope of the clearance requested. It may be easier to obtain FSD clearance now that the guidance itself sets out the scope of such clearance.

The 2007 guidance merely clarifies the Regulator’s current views and practice. There are no transitional issues. Therefore, although the guidance is still in a draft form it is appropriate to use it already. We believe that it is unlikely that there will be any substantial amendments to the guidance following consultation. However, at such time as the Occupational Pensions Schemes (Employer Debt) (Amendment) Regulations 2007 come into force (anticipated in December 2007) those prescribed changes will modify the current debt arrangements following the cessation of participation in a scheme. At that stage the clearance guidance will likely need to be amended to reflect those regulatory changes.

Clearance remains voluntary and while the guidance sets out the way in which the Regulator expects applicants and trustees to assess whether clearance could be applied for, it is not necessarily the case that, where an event appears to be a Type A event, clearance should be applied for. An applicant will need to consider whether the event could lead to the Regulator using its moral hazard powers. If this is improbable then the employer may consider that the cost of a clearance application (in terms of, for example, the cost of a covenant review) cannot be justified. On the other hand employers should have in mind that, if there is a transaction in the future that has an effect on the scheme, or if the position of the scheme deteriorates, the Regulator, when considering the reasonableness of using its powers, may take a past event into account.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.